Dec 12, 2019
The United States produces sugar cane and sugar beet, but it also imports sugar from Mexico, Australia, and many other countries.
Why?
The United States doesn’t have a comparative advantage in producing sugar. Other countries can produce sugar at a much lower opportunity cost than can U.S. farmers, so the United States imports sugar.
But if the United States imports sugar, why is the price of sugar in the United States around triple the world price?
The reason for this high price is that the U.S. government limits sugar imports with an import quota.
How does an import quota work?
The import quota raises the price of sugar in the United States, so the quantity of sugar supplied by U.S. producers increases and the quantity of sugar demanded by U.S. consumers decreases. With the increase in quantity supplied and the decrease in quantity demanded the quantity of U.S. imports decreases to the amount of the import quota.
Because U.S. sugar producers sell more at a higher price, producer surplus increases. But U.S. consumers are worse off. They buy less sugar at a higher price. The gain to producers is less than the loss to consumers, so a deadweight loss arises.
Let’s make a graph to illustrate this outcome.
Now take this short quiz to check that you understand what you have just read.
Multiple Choice Quiz—The Sugar Market